Investment

Question 1

Dow Jones

Answer 1

Consist of 30 industrial stocks, 20 transportation stocks, and 15 ultitlity stocks. The DJIA is the 30 industrial stocks. It is most widely quoted but narrowest measure of the market.
It is price -weighted average

Question 2

S&P 500

Answer 2

This is a float weighted index that includes the largest issues that trade in the NYSE and a few OTC issues. It is a broader measure of NUSE activity

Question 3

Russell 2000

Answer 3

This is a popular capitalization weighted index of stock price performance of smallest 200 stocks in the Russell 3000 index

Question 4

Wiltshire 5000

Answer 4

Broadest measure of activity and movement of the overall stock market. This value weighted index consist of over 7000 issues that trade on NSYE, AMEX, and OTC

Question 5

Value line

Answer 5

Equally weighted index consisting 1700 selected issues that are on the NSYE, AMEX and OTC market

Question 6

NASDAQ

Answer 6

Broadest measure of OTC trading. This is capitalization weighted index includes all the issues that trade in the NASDAQ ststem

Question 7

Europe, Australasia and Far east (EAFE)

Answer 7

Typically compare to S&P 500 index to show relative performance of the U.S and international Equity markets

Question 8

Question 9

Question 10

Black-shield option valuation model

Answer 10

Value non-dividend paying stock:
- price of the underlaying stock
- excercise price of the option
-time remaining to the expectation of the option
- interest rate
-volatility of the underlying stock

Note: increase in the excercise price of a call decrease the call’s value ( indirect relationship )
A increase in the excercise price of a put increase the put’s value (a direct relationship)
All other variables have a direct relationship for calls or puts

Question 11

Coefficient of variation (CV)

Answer 11

CV measures relative variability to compare investments with widely varying rates of return and standard deviations : S.D./average(mean)

Question 12

Standard deviation vs Beta

Answer 12

Question 13

beta coefficient

Answer 13

Standardized mutual fund for risk.
Divide a specific fund’s realized return by its beta coefficient.
(SML and Jensen/alpha)

Question 14

Time-weighted mean vs dollar-weighed mean

Answer 14

Time weighted mean: compare manager’s performance. Factors percentage.

Dollar-weighted mean: compare absolute dollar amount with financial goals. Factor cash flow.

Question 15

Geometric mean calculation

Answer 15

Question 16

IRR( dollar weighted calculation)

Answer 16

Question 17

Question 18

If pays no interest, no reinvestment risk; such as EEand Strips

Question 19

Duration

Answer 19

Weighted average maturity of the bond’s cash flow on a present value basis.

High coupon=low duration (inversely related)

Long maturity= high duration (positively or directly related)

Short duration = high risk

Question 20

Yield curve

Answer 20

Compares yield of similar bonds but with different maturities.

The curve show the market rates of interest for bonds of different maturities with the same credit ratings.

Question 21

The goal of immunization is to protect the bond portfolio from interest rate fluctuations and reinvest rate risk by purchasing bonds with different maturities

Question 22

Using duration to manage bond

Answer 22

• UPS(interest to up_ shorten duration)
  -FAL (interest to fall_ lengthen duration)

Question 23

TIPS

Answer 23

Issued in minimum denominations of $10000.
Interest are fixed.
interest payments vary as principal is adjusted for inflation and deputation.

In any year when the principal value of bond increases due to the inflation adjustment , the gain is reportable tax (phantom income )

Question 24

EE bond after 2005

Answer 24

Non marketable, non transfer table, nonnegotiable, cannot be pledged for collateral.
Issued at face value, fixed interest rate.
Interest accrued monthly, compounded semiannually
Must be held for 1+

Question 25

I bond

Answer 25

Inflation indexed accrual securities. Unlike EE, it has no guaranteed securities.

Question 26

NOI does not factor in debt service cost. Can depreciate it

Question 27

Question 28

Liquid securities

Answer 28

Short term CD, laddered CD, life insurance cash values.

Question 29

DDM

Answer 29

Market lowers the required rate of return for stock, the value of common stock will rise

Higher Required rate of return or lower dividend— value common stock decrease

If investor expect that growth in dividend will be higher as a result of favorable development of the firm, the value of common stock will rise